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Pennsylvania Amends Act 47 to Give the Commonwealth More Oversight and its Municipalities Less Time to Reorganize

Pennsylvania’s legislature recently approved House Bill No. 1773, an overhaul to its Municipalities Financial Recovery Act, commonly known as “Act 47.”  HB 1773 was signed into law by Governor Tom Corbett on October 31, 2014.

Act 47 was established in 1987 to provide the Commonwealth, largely through the Governor’s office, greater oversight over financially troubled municipalities.  Under Act 47 (currently and after the amendments go into effect), if a municipality is found to be in financial distress the Commonwealth is authorized to pursue a series of escalating steps to address the municipality’s financial problems, ranging from a coordinator to a receiver selected by the Governor.  At each level of state oversight, municipalities are required to adopt or abide by recovery plans to address their respective financial distress.  No Act 47 plan may unilaterally alter the rights of bondholders.

The primary changes to Act 47 include the following:

  • Termination Date:  The amendments establish a maximum 5 year exit strategy.  While the amendment does not stop a municipality from returning to Act 47, its intent is to move municipalities more quickly through an Act 47 rehabilitation.  This change will impact municipalities, such as Pittsburgh, which is presently under Act 47 oversight.  The amendment will require all current Act 47 municipalities to exit Act 47 oversight within 5 years from the date of their most recently enacted recovery plan.

  • Early Intervention Program:  With the goal of preventing municipalities from experiencing significant financial distress, the Commonwealth will establish an early intervention program to provide resources to municipalities to manage potential financial distress.  This early intervention program may provide financial support to municipalities through grants (subject to partial matching by the municipality) to develop plans for fiscal stability.

  • Ability to Raise Certain Taxes:  The amendment will allow a municipality under certain circumstances to petition to triple the applicable local services tax.  However, the amendments exempt Pittsburgh from this potential opportunity.

  • Disincorporation:  While it is unlikely to be a common occurrence, the amendments outline a process for disincorporation of “nonviable municipalities.”  For purposes of the disincorporation provisions, the definition of municipality excludes any city of the first class – which only includes Philadelphia. The process of disincorporation involves both state court and gubenatorial oversight. Upon disincorporation, the municipality is established as an unincorporated services district and the municipality’s assets (including bondholder collateral) would vest in the Commonwealth and be held in trust for the residents, property owners and other parties in interest.  While the amendments appear to preserve bondholder rights to collateral and payments of debt obligations, bondholders involved with a municipality that may disincorporate must be vigilant in preserving their rights to both their collateral and future debt service payments.

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About this Author

William W. Kannel, Bankruptcy Attorney, Mintz Levin Law Firm
Member

Bill’s practice focuses primarily on commercial law, workouts, and corporate reorganization. He has represented various institutional lenders, indenture trustees, bondholders, and other creditors, debtors, and trustees in all manner of insolvency proceedings in courts throughout the United States.

His industry experience encompasses municipalities, airlines, hospitals and other health care facilities, retail, telecom, energy and clean tech, waste disposal, military housing, hotels, and educational institutions.

He has substantial experience in all phases of bankruptcy...

617-348-1665
Adrienne Walker, Mintz Levin Law Firm, Boston, Bankruptcy Law Attorney
Of Counsel

Adrienne has significant experience in workouts, restructuring, and bankruptcy matters. She represents corporate debtors, secured and unsecured creditors, lessors and lessees, and trustees in federal, state, and out-of-court restructurings. Her clients represent a variety of industries, including retail, textile manufacturers, biopharmaceutical, computer software, aviation, jewelry, and automotive.

She is also experienced in creditors' rights, commercial litigation, and commercial arbitration. Adrienne’s recent experience includes successfully counseling corporate debtors as they navigate the complexities of Chapter 11, often in connection with a Section 363 sale of the client’s business. In addition, she routinely represents secured creditors and derivative contract parties in maximizing return on their agreements.

617-348-1612